This post is about drug companies raising prices, but it will not be about Martin Shkreli and his company. (I’ve decided, by the way, to stop referring to it by name, because it annoys me no end that it’s such a blatant attempt to borrow the name recognition of a great man). No, I’ll just mention that despite his public statements, Shkreli doesn’t seem to have actually announced any new price for Daraprim, so his business model continues to have a lot more in common with an extortion racket than a legitimate drug company.
The rest of this post is going to be about a bigger problem: Valeant. They’ve been taking a lot of fire recently, and they most certainly deserve it. When you look at their pricing behavior (as shown in this Financial Times article), they’re just only a shade less blatant than the Martin Shkrelis of the world, and they work on a much larger scale. I’ll give Shkreli something, though: he pays lip service to the idea of R&D, and (comically) says that his high prices are there to support it. Valeant doesn’t bother with any of that crap. (When they do start talking about internal research, they’re mostly wrong). No, the company’s position has been clear for years now: R&D is for losers and fools. I mean, you can lose money doing that stuff, and why would you ever put yourself in a position to lose money? Better to let someone else de-risk everything first, buy them, and then ramp up the prices, right?
It will surprise no one that Michael Pearson, the company’s CEO, is a former McKinsey consultant who hit on this business plan during his time looking over the industry from outside. (In the same way, Martin Shkreli had his insight while investing – unsuccessfully, it has to be noted – in biopharma companies while running his own hedge fund). In both these cases, we have people who are approaching the whole business as an exercise in financial engineering. In the same way, a Wall Street type like Bill Ackman can defend the company by saying that the money they’ve paid to buy out other research organizations is, you know, pretty much the same as spending it on research itself, right? So Valeant is actually one of the biggest R&D spenders out there, right? (That last link will explain more about how defective that line of reasoning is, although it may be apparent already, and if you’ve guessed that Ackman is a large investor in Valeant, your radar is calibrated correctly). My own take on Ackman’s idea has already been said by Orwell, that one would have to be part of the intelligentsia to believe something like that, because no ordinary person could be such a fool.
The whole “it’s-money-that-matters” approach (as I’ve mentioned before) is exactly what most critics of the drug industry accuse every company of doing (“You don’t care about patients! All you care about is your quarterly earnings, you heartless pirates!”) But here are the people living the stereotype, and proudly. Doesn’t matter that this strategy brings the whole industry into even worse repute than ever, which is quite an accomplishment. That’s not Valeant’s problem. Doesn’t matter that it’s a parasitic business model that can only work as long as not too many other companies decide to follow it: that’s not Valeant’s problem, either. Doesn’t matter that it infuriates patients and insurance companies either, as long as they keep reaching into their pockets while they’re shouting and hopping around. Should we double the prices of our drugs this year? Why the hell not?
. . .Valeant’s practices stand out among the larger pharma and biotech companies.
So far this year, it has raised the sticker price of 56 drugs or about 81 per cent of its portfolio, according to analysts at Deutsche Bank. The average price increase was roughly 66 per cent while the steepest, for the gastrointestinal drug Zegerid, was 550 per cent.
By comparison, US group Pfizer has increased the price of 51 of its drugs so far this year, equivalent to roughly 71 per cent of its portfolio; the average rise was roughly 9 per cent while the sharpest was 15 per cent.
The only bright spot I can see in all this is that (as the FT article says) the company has had to take on substantial debt to acquire all these drugs, which means that their strategy is predicated on being able to get away with such price increases for an extended period. And they’re already cut expenses back about as far as they can go, presumably: the company spends 3% of revenue on R&D, as compared to a big-pharma average of about 15%. (And if you want to talk about marketing spend versus that, see here). Pearson himself is telling investors, and everyone else who will listen, that Valeant, while it just might have conceivably based some of its business on price rises at some point in the past, will henceforth earn bushels of money by increasing sales volume instead. No one can get upset about that, can they? But since the company doesn’t say very much about sales volume to start with, analysts are having a hard time getting behind that idea. And the company’s debt load can only make sense in an environment of near-zero interest rates, but one hears persistent rumors that these may not obtain forever.
So we’ll see how Valeant holds up. There’s a well-known reward for those who live by the sword, and I’d be lying if said that I’m not looking forward to watching them claim it.